Address to the Nation About Inflation and the Economy.

Mr. Smith, all of the very distinguished guests on the podium and in this audience, and all of the millions listening on television and on radio:

I want to discuss today the major problem confronting America--inflation.

And I want to discuss where we are in the fight against inflation, how we got here, and what we are going to do about it.

Let me begin by touching briefly on the nature and causes of the inflation we have been experiencing.

Basically, we and the other industrialized nations have had a generation of inflation, because governments all over the world, for a long period of time, have permitted and encouraged the demand for goods and services to outrun the capacity to meet that demand with rising production.

Governments have repeatedly increased their own spending more than taxation. They have added to the demand without making a balancing cut in private spending. They have created new money to finance more borrowing and investment than people were willing to finance out of their savings. Now, all of this has added to the upward pressure on prices.

The great worldwide surge of inflation in the past year and a half was caused by three exceptional circumstances coming at once.

One was a decline in world grain production as a result of bad weather in many areas of the world. Another was the oil embargo, together with the action of the oil-exporting countries in suddenly quadrupling oil prices. And the third was a simultaneous economic boom in the industrialized nations, which increased demand for goods far beyond the capacity to produce them in those nations.

Now fortunately, although other inflationary pressures continue, food production now has increased. The oil embargo has ended. World oil prices have leveled off. The worldwide economic boom has slackened.

And so, these particular inflationary forces are no longer propelling the inflationary spiral upward to the same extent that they were. We must recognize, however, that the higher price levels that have been reached by oil and other raw materials will continue to exert strong upward pressures for a time as they work their way through the economy.

We are also now feeling the effect of last year's surge of prices in the form of an understandably strong drive for large wage increases, as workers try to catch up with earlier cost of living increases.

Confronted with an unacceptable level of inflation on the one hand 'and with a temporary slackening of economic activity on the other, many voices have lately been raised in America demanding some swift, spectacular action. Some ask for reimposing wage and price controls. Others recommend that we wring out the economy with higher taxes or sharply restrictive monetary policies, even at the cost of a severe recession. And then, on the other hand, there are those who urge that we should lower taxes in order to pump up the economy more rapidly. And still others suggest that we should simply give up--that we should accept a rampant inflation as a mysterious and incurable disease and concentrate on learning to live with it.

Well, we are not going to do any of these things. Let me tell you why not, and let me tell you what we will do instead.

If experience teaches anything, it is that economic policies aimed exclusively at short-term relief too often bring long-term grief.

We must learn to think less in terms of programs and more in terms of policies, policies of respect for the basic laws and forces of the marketplace and of recognition that in those policies lie the keys to our economic future. And so, let me tell you first what we are not going to do.

We are not going to resort to the discredited patent medicine of wage and price controls. To return to controls now for temporary relief would only create new distortions and, thus, intensify our long-term difficulties, and lead in the end to even more inflation when the controls came off.

We are not going to respond to the short-term slack in the economy by priming the pumps of inflation with new deficit spending or with a new easing of credit or with tax cuts that would only make inflation worse. These actions would be like pouring gasoline on a raging fire.

And neither will we administer the shock treatment of a sudden drastic "wringing out" of inflation, the cost of which in terms of increased unemployment for millions of Americans would be unacceptable.

Now let me tell you what we are going to do.

Our aim is to control inflation while continuing to produce more, so that people can live better. The key to this lies in keeping our eye squarely on the long term--and keeping it there even as we actively manage our short-term difficulties. It lies in choosing a sensible, realistic course and sticking to it, whatever the pressures. And that is exactly what we shall do.

We will continue to monitor every sector of this economy. And I can assure you that we will take what actions are necessary to prevent undue hardship in any sector of the economy. But we will not react either to general or to specific needs with gimmicks or emotionalism, and we will continue steadily on our basic anti-inflationary course.

A policy to check inflation is fundamentally a policy to curb the growth of demand relative to the growth of supply. In the short run, attention must focus on holding down the increase in demand, because with few exceptions, increasing supply takes a considerable amount of time.

There are exceptions, however, where changes in Government policy can result in rapid expansions of supply. Examples on which we have already acted include the turning back into production of tens of millions of acres of farmland which had previously been kept idle and the sale of excess Government stockpiles of certain raw materials.

In the longer run, we can focus more on increasing the growth of output--on producing more rather than on demanding less. So our strategy must have two elements-mainly restraining demand in the short run and expanding supply in the long run.

Let's turn now to the Federal Government. The most obvious thing the Federal Government can do to restrain demand is to hold down its own spending. For the current fiscal year, expenditures under the budget I submitted in February would be $305 billion. A variety of forces, the most important being pending Congressional legislation in excess of the budget, threaten to raise this to $312 billion--over $7 billion over the budget I submitted in January. Undoubtedly, more spending proposals will be pressed in Congress in the months ahead.

I will not accept this inflation of the Federal budget. On the contrary, I am determined to cut below the $305 billion I submitted in January toward a goal of $300 billion. I intend to veto Congressional actions that would raise that spending above the budget. And beyond this, I have directed the heads of all Federal departments and agencies without exception-to trim already-programmed Federal spending toward the goal of $300 billion.

I have also ordered a reduction of 40,000 in the number of Federal employees provided for in the budget for the current year. This alone will save $300 million.

For the 1976 fiscal year--in which we are now preparing the budget--a year which begins in just 11 months, I shall submit a budget that will not only be in balance but that will actually reduce the rate of growth of Federal spending, so that the increase from 1975 to 1976 will be less than the increase from 1974 to 1975 rather than more. And when necessary, in proposing this budget, I shall propose repeal of existing legislation that makes spending mandatory.

Two weeks ago, I signed the Congressional Budget and Impoundment Control Act of 1974. For the first time in our Nation's history, this law provides a mechanism for the Congress to consider the whole budget comprehensively, not just its parts. It will be essential that this law be used effectively with the clear, continuing objective of reducing or eliminating expenditures that would help some of the people, but cause higher prices for all of the people.

We have to understand one fact. The President alone cannot cut the cost of Government. This new law provides a means by which the Congress and the President can work together to accomplish that goal. And I am confident that a majority of the Members of the Congress will support the efforts of the President to balance the Federal budget so that millions of Americans will have a chance to balance their family budgets.

The other principal weapon in the Government's arsenal to control inflation is monetary policy--that is, the control over the expansion of money and credit.

It is the function of the Federal Reserve System to maintain an adequate supply of money and credit, but to prevent that supply from rising too fast. The Federal Reserve is doing so. Holding down money and credit in the face of a rapid inflation causes high interest rates, which nobody likes. But allowing more rapid monetary expansion would soon cause even more rapid inflation and even higher interest rates. And therefore, the course of the Federal Reserve, the course it is on, is the necessary route to less inflation and lower interest rates.

Like any other part of the anti-inflation program, monetary restraint can be overdone. It has not been overdone up to this time, and it will not be overdone. We shall provide the expansion of money and credit necessary to support moderate growth of the economy at reasonable prices. Chairman Burns, of the Federal Reserve, has assured me of the intention of the Federal Reserve to avoid extremes of restriction in the effort to conduct an effective anti-inflationary monetary policy--an effort which every American should endorse. There will not be a credit crunch in which the money for essential economic activity becomes unavailable.

And so, as far as the Federal Government is concerned, we will cut the growth of Federal spending. We will hold down the growth of money and credit to check private spending. And I call on State and local governments, and on businesses and consumers, to hold down their own spending and increase their own savings as their contribution in the fight against higher prices.

I recognize that some Americans cannot cut their spending without real hardship. And I recognize that some expenditures by business cannot be cut without cutting production now or in the future and, thereby, increasing unemployment. But most families could reduce or defer some expenditures--building their savings instead--without hardship. And every business has some fat in it, just as every Federal agency has. And State and local governments, whose spending has been rising rapidly, should follow the lead of the Federal Government in cutting unnecessary spending.

Now, there are cynics who will say that such an appeal to the public spirit of the American people is futile. Well, I don't believe that. We saw how the American people saved during World War II. And just last winter, we saw how the American people conserved gasoline and fuel oil and avoided, as a result, gas rationing and all the consequences that would have flowed. In my recent meetings to discuss the economy and in my mail, I have had abundant evidence of the willingness of the American people not only to cooperate but to join actively in the battle against inflation.

Less spending means less pressure on prices today. More saving means more investment in new housing and new production and, therefore, lower prices tomorrow. And the consumer--and that is everybody--wins both ways.

I referred earlier to the significance of a $12 billion difference in the Federal budget. A cut of only 1 1/2 percent in personal consumption expenditures--that would mean like putting away 15 cents for every $10 spent--would make a similar difference in the fight against inflation.

How rapidly we succeed in cutting inflation will also depend on business and labor. If they continue pushing prices and wages rapidly forward, this will continue the inflationary pressures. But sales will suffer, because consumers will resist' paying higher prices, and employment will also suffer, and no one in the end will be better off.

And therefore, in their own interest as well as in the Nation's, it is essential that business and labor act responsibly in their price and wage demands. As I have said, we shall not return to price and wage controls. But I intend to use every influence of the Presidency and of the Federal Government to bring about helpful voluntary restraint on the part of both business and labor in this critical area.

In the short run, as I have said, we must focus on measures to restrain demand. But to achieve prosperity without inflation in the long run, we must focus above all on producing more so that we can have more goods and services without higher prices.

To assure a vigorous growth of supplies in the lot, get run, a number of critical measures are necessary.

A good example is agriculture, where today less than 5 percent of our population feed all of America and help feed much of the rest of the world as well. We must keep our agricultural programs focused on a policy of abundance as they now are, rather than on a policy of scarcity.

We have seen vividly the importance of energy supplies and energy prices in the U.S. economy over these past few months. We must now take all necessary steps to assure ourselves of reliable supplies of energy at the lowest possible cost. That is the essence of Project Independence on which we are now moving steadily forward. Let us take whatever steps are necessary to make sure that the United States will never again be hostage to a cut-off of vital energy supplies by any foreign country. And here is another area where the President alone cannot do the job. We need the cooperation of the Congress on many pieces of legislation in this area which await action.

We need to assure adequate long-term supplies of capital for investment, another area we have discussed at great length in recent weeks. In May, I directed the Chairman of the Council of Economic Advisers to undertake a special study of long-range capital needs to provide for the continued growth of our economy and how to ensure that these needs may be met.

Too often today the creative energies of our economic system are stifled by burdensome overregulation based on policies designed for an earlier era. For example, Government regulations often require trucks to run empty. This wastes fuel, and it raises the cost to the consumer of everything these trucks carry. That is just one example. Many others could be cited. And consequently, I have directed a sweeping review of these policies with the objective of recommending these changes needed to bring the regulatory agencies and regulatory policies in line with the needs of a new era when increasing productivity must be a primary means of achieving our primary economic goals.

And where regulatory agencies, because of obsolete rules, have the effect of restricting production rather than encouraging it, those rules need to be changed. And they will be changed.

Some of the most important regulations from this standpoint are not Federal, but State or local, such as obsolete building codes. Therefore, this review will encompass the reforms needed at all levels. At the same time, I again urge the Congress to enact the regulatory reforms that I have already proposed--with respect to transportation and financial institutions, for example--in order to make our economic system more productive and less inflationary.

And now we come to a very sensitive political point. It is time for us to reevaluate the trade-off between increasing supplies, increasing production, and certain other objectives that are worthwhile, such as improving the environment and increasing safety. Those goals are important, but we too often, recently, have had a tendency to push particular social goals so far and so fast that other important economic goals are unduly sacrificed. And consequently, these policies must be reevaluated and adjusted to the new needs.

Congress should. enact the trade reform bill so that negotiations to reduce trade barriers can begin. This sometimes sounds like an esoteric subject of interest only to those who are in international trade. But competition from abroad can be a powerful force toward increasing productivity in the United States, creating more jobs, making more supplies available for American consumers, and in holding down prices.

Finally, and most important, we must restore the idea in America that the way to have more is to produce more. This is true of a nation, it is true of individuals. Too many countries are in extreme difficulty because their people have come to believe that the way to get more is to have the Government spend more, even though no more is produced. That has often been true in this country.

It is often said that we have worldwide inflation because people demand more. That is just a half-truth. We have worldwide inflation because people's demand for more is not matched by a willingness and ability on their part to produce more. The demand too often is translated into a supply of votes, not a supply of work, saving, initiative, and innovation.

In America--and may it always be this way--the power of government is the power of the people. And therefore, the most important responsibility of each American in fighting inflation is your responsibility-those of you in this room and the millions listening on television and radio. I can assure you that your Government will take firm measures, measures that will be unpopular with many special interest groups. The voice of the people in support of sound anti-inflation policies needs to be heard in Washington above the voices of the special interests.

In fact, we need in this country the one lobby we don't have--an anti-inflation lobby. This should not be a lobby with plush Washington offices and high paid officers--and I am not reflecting on any of the people who may be lobbyists here. This lobby should have an office in every home in America, and every citizen should be an officer in it. When every Government official--whether in the executive branch, in the Congress, or in State and local governments--knows that this anti-inflation lobby will reward anti-inflationary action and punish inflationary action, the fight against inflation will be won.

We have looked, as we should, at many of the troubles in the American economy today, but we must also recognize that despite its troubles, the American economy today is the envy of the rest of the world. One needs only to travel, as I have in recent months and over the years, to other nations, particularly industrial nations, to realize the truth of that statement.

Painful as our own inflation is, it is less than that of France, of Italy, of Great Britain, of Japan, and less than that of most of the industrial nations of the world.

In fact, time and again I have found in recent months the leaders of other countries marveling at the great economic strength of America and wishing that they could exchange their economic difficulties for ours.

And consequently, as we look at the troubles in our economy today, we must not overlook its strengths. We have the strongest economy in the world by far, and we can win any economic battle that we determine to win. We are out to win the battle against inflation, and with our strong economy, we have the resources to do it.

As we look at the strengths of that economy, we have more jobs in America today than ever before, and those jobs pay higher wages, real wages, than in any other country in the world, even in the area of food costs, which we all know is one that really strikes home to whoever keeps that family budget. A smaller percentage of the wage earner's income goes to food in the United States than in any country in the world.

Young Americans today are finding work, rather than facing the draft, and we can be thankful for that. And if our unemployment, which is holding lower than we had earlier predicted, if it is higher than we want--and it is let us be thankful that those who may be unemployed are not facing the draft and not serving in any war overseas.

In fact, we can be thankful that our problems today are the problems of peace, rather than the problems of war.

We will win the fight against inflation, but we are going to win it not by a single set of dramatic actions, but by the cumulative effect of actions that in themselves are often undramatic, actions that may not make headlines in the morning newspapers, but that will be the right actions to take.

In economic policy, impatience is the great enemy of sound policy. If you look at the history of inflation in America, more than anything else it can be laid at the doorstep of impatience: impatience to spend money we have not yet earned or to spend taxes we have not yet collected; impatience to satisfy all of our social wants at once, without regard to the fact that we cannot afford everything at once; impatience with the short-term dislocations that often are part of long-term adjustments needed to keep the economy growing in a healthy rather than an unhealthy way.

The key to fighting inflation, therefore, is steadiness. The steadiness that accepts the need for hard decisions, for occasional unpleasant statistics and even a measure of sacrifice in the short run in order to ensure stable growth without inflation for the long run, the steadiness that stands fixed against the clamor to take dramatic action just to create an appearance of action, and the kind of steadiness that rejects demagoguery, that rejects gimmickry, and that gives the enormous creative forces of the marketplace in America a chance to work. That is our strength, the free marketplace in America, and we must keep it free.

And so, I say to you that we are on the right road toward our goal, a goal of full prosperity without war and without inflation. We are going to stay on that road.

We will be steadfast in holding down Federal spending, in slowing the growth of the Federal budget.

We will have moderate but firm restraint on the growth of the money supply.

We will work creatively with other nations to deal with inflation in its worldwide dimensions.

We will take new measures to encourage productivity, and this is perhaps the most important long-term objective we can set for ourselves--to encourage productivity and to increase supplies of scarce resources. And in particular, we are going to press vigorously forward in increasing supplies of energy and food--the biggest components of the recent inflationary surge.

We shall Stand firm against efforts to turn us aside from the steadiness of course that is necessary.

We intend to devote the full energies of the Federal Government to the fight against inflation. And I ask for your support, for the full support of the American people in this great cause.

In 1976, America will celebrate its 200th anniversary as a nation.

Let our goal for that anniversary be an America at peace with every nation in the world, a peace that we helped to bring about. And here at home, let our goal be an economy of prosperity without war and without inflation.

That is a great goal. It will require the united efforts, the dedication of government, of business, of labor, and of individual Americans all over this country.

What you do, each and every one of you, will matter.

As you play your part in this great crusade, you can be confident that your Federal Government will play its part. And together, we can achieve the goal that all of us want: the goal of full prosperity without war and without inflation for ourselves, for our children, and for America's future.